MorningWord 7/17/13: To say that there has been an odd bifurcation this year among sub-sectors in the Technology space would be a bit if an understatement. Semi-conductors and certain Comm-Tech have seen a massive resurgence (SOX up 27% ytd & CSCO up 30%), Internet has dominated (GOOG up 30% & AMZN up 22%) , yet those sub-sectors viewed as “commoditized” like PC Hardware and Smart-phones have struggled. Investing successfully in Tech so far in 2013 has taken a bit of stock-picking prowess as once relative strength darlings of the last few years like CRM, EMC, IBM & QCOM are all basically unchanged on the year, while AAPL is down about 19%.
Looking at the make up of the XLK, the Technology Select ETF (which is up about 12% ytd, under-performing the SPX up 17.5% and the Nasdaq up 19%) it’s not hard to to see why. The top 10 holdings in the XLK make up ~62% of the weight of the index, yet only 5 of those stocks are up over 10% on the year. Those 5 are up an average of ~26%, while as evident below, the other 5 are flat, up small, or down a lot in AAPL’s case.
|XLK top 10 Holdings|
|ytd gains||% weight|
To try to suggest that it’s been a rotation into large cap old cheap tech doesn’t really work as AAPL and ORCL fall into that category. Obviously AAPL is a massive weight on the index, just as it has been a huge boon for major Tech indexes for the last few years prior to Sept 2012. As I suggested yesterday in this space (here) if the ytd rally is going to have continued legs, it will likely need to broaden out, and laggards such as AAPL, IBM, ORCL & QCOM will have to join the party. The thought that stocks like MSFT and GOOG sporting $300 billion market caps could see 40% or 50% gains in a year that markets are making all time highs is actually kind of frightening to be very honest.
Tech is a funny sector as stock performance is often tied to product cycles, at least for the consumer oriented names, while many of the enterprise focused names are increasingly levered to emerging market growth, both areas that seem to be lacking at the moment. Which as lead some investors just ignore traditional investing inputs and just play for cheap, strong balance sheet, big buy back, decent yield and possibly cyclical plays in the event of a full blow recovery. This was a massive theme in Q2, not sure it is the sort of thing that continue to play out in the same names that have worked so far. Remember last summer when not a sole in the world could find a single reason why AAPL would ever sell off??? Yeah, Yeah Its different this time in GOOG, AMZN etc….I get that, but not really, its all gonna be a matter of when and from where, sorry to break it to you.
So as we head into the meat of Q2 earnings season the eye-popping gains that have come largely since Q1 results in April could come under some heavy scrutiny if Q3 and second half guidance were to disappoint. I know it sounds like a ridiculous notion that stocks could actually go down, but recent earnings gaps of ~10% from the likes of ACN & ORCL should cause some investors to take pause when looking at some of their Tech holdings.